Is a Recession Coming?

JP Morgan (JPM) CEO Jamie Dimon joined the crowd of naysayers forecasting doom for the markets during the company’s recent earnings call.

During the call, he said that the economy is “as good as it’s ever been,” citing data that the economy was near the top of a cycle. “Obviously, it’s going to get worse,” he said, adding that he wasn’t predicting a recession.

A Little Context

Although its markets have received a shellacking in recent times due to fears over China’s stock market and declining energy prices, the US economy is in a more robust shape as compared to other economies.

Unemployment figures are near 5% and the housing market seems to have recovered from the financial crisis. Inflation is low and a number of other indicators, such as consumer spending, look good.

That said, there are a number of other wrinkles that are generating fears about a slump. For example, while they have been good for consumers, low energy prices have adversely affected the manufacturing industry’s prospects.

GDP growth slowed to 1% last quarter. Similarly, global deflationary forces, such as low demand in important markets such as China and a strong dollar, could swing the U.S. economy towards deflation.

A Different Perspective

According to Capital Economics, a research firm, the prospects of a future recession look slim.

In a research note the firm stated that there was no specific length for a business cycle: “Since 1960, the average period between recessions has been eight years in the US and seven in the UK, so the current expansions are not particularly long in the tooth.

The argument is even less valid for the euro-zone and Japan, whose recoveries are still at an early stage.”

The firm further suggests that the weak scope and extent of economic growth suggests further room for growth: “Unless there has been a large and permanent loss of productive capacity, there should be plenty of scope for further expansion in these economies (Japan and EU).

What’s more, even where spare capacity has been largely eliminated, the next phase may simply be a period of trend, or even slightly above-trend, growth rather than a new recession.”

In another research note, economists at the firm provided a number of reasons why they were not joining everyone else in “panicking wildly about the possibility of a global deflationary slump triggered by a China collapse”: “Our China economists see Chinese growth stabilising and even if the supply response is taking a bit longer, oil prices should eventually rebound modestly.

Even if they don’t,the global economy did just fine with oil at $30 a barrel in the 1980s and 1990s.”

They also cited GDP dips that were succeeded by economic growth during the recovery cycle from the most recent financial crisis as evidence that the fourth quarter contraction in GDP would not matter in the long run.

The Bottom Line

Recent economic news out of China and low oil prices point to another recession. Most experts base their thesis for another recession on business cycles.

According to them, the economic expansion of the past six years is due for a correction soon. However, as research from Capital Economics shows, the proof for this trend is up for interpretation.

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